This is the perfect time of the year to ask yourself this question. "Do I really want to fly by the seat of my pants as a renovation contractor, or do I want to try to come up with the Three Year Business Plan?"
December 11, 2013 by Mike Draper
As you (hopefully) take a little time off in 2 weeks, have you thought about creating a business plan for 2014?
Here’s some business planning tips from our resident contractor coach, Mike Draper (www.renovantage.com).
We ran this article this time last year. Many of you said it was useful. So here it is again.
HOW TO CREATE A 3-YEAR BUSINESS PLAN
by Mike Draper
STEP 1: DESCRIBE YOUR BUSINESS IN 3 YEARS TIME
You must take a look at what you want your business to look like in three years. Don’t look farther out than that as there are too many variables to forecast accurately beyond three years. You need a specific goal for your business: what kind of business will it be, how big will it be, and what your role will look like. And, a critical question to answer is, how much money am I going to need to make? “As much as I can” is not an acceptable answer. You must set a realistic and specific goal so that you can build a plan to get there.
STEP 2: DETERMINE YOUR REVENUE, GROSS PROFIT AND NET PROFIT AT 3 YEARS
How much revenue will you need in order to reach the goal in Step One? Start with the Gross Margin you are achieving today to see if it is possible. Do a simple calculation that looks like this:
Gross Profit = Gross Revenue minus Job Cost Expenses
Net Profit = Gross Profit minus Overhead
Gross Profit = $300,000 ($1,000,000 Revenue minus $700,000 Job Costs)
Net Profit = $100,000 ($300,000 Gross Profit minus $200,000 Overhead)
You will need to play around with the numbers until they give you the Net Profit that you are looking for. In the example above, you would need $1,000,000 in revenue to provide yourself a $100,000 Net Profit, which should be after you have paid yourself a salary for the work you do. The typical Net Profit number you should be aiming for is 8 to 10 per cent of your Gross Revenue. Net profit is always the amount left over after you have paid yourself for the work that you do. So if you are the project manager and that job is worth $60,000 at your firm, then you should pay yourself the $60,000 before you calculate your Net Profit. Remember to use realistic numbers in the formula. If you don’t pay yourself for all of the jobs you do in your company, you will never have enough money to pay someone else.
STEP 3: WORKING BACKWARDS, SET A REVENUE GOAL FOR YEAR 1
Work the three years backwards to set a goal for the first year. Does this new revenue target make sense or is it totally unrealistic? If you are not sure, leave it where it is and continue, for now, to Step 4. To reach $1,000,000 from where you are today, let’s say $350,000, you would need to scale your revenue something like this:
Year One Revenue = $500,000
Year Two Revenue = $750,000
Year Three Revenue = $1,000,000
STEP 4: DETERMINE HOW MANY JOBS, AT WHAT AVERAGE SIZE, YOU WILL NEED
Based on your current average job size, how many jobs would you need to complete to add up to the revenue goals that you set in Step Three? Here is an example: If your goal is $1,000,000 and your average job size is $50,000 then you would need 20 jobs. What would be needed in your company to deliver on $1,000,000 worth of work? How much manpower would you need to add to cover this workload? How much advertising and marketing would you need to do to find 20 jobs? Where would you look for enough leads to generate enough opportunities so that you could win 20 jobs? As you can see, this is a very tough step and the one where the majority of contractors who don’t reach their goals, fail at. If you feel that this is an impossible step, then you need to look for outside help. Find an advisor who can analyze where you are at and how you can accomplish the goal that you set out in Step Three.
STEP 5: SET “SMART” GOALS TO GET THOSE JOBS
Execution is everything. Having the barebones of a plan, from Steps 1 through 4, is great. But executing on that plan is critical. It is like the best laid plans to get in shape by buying a gym membership. If you don’t execute by going to the gym, nothing happens. Same with the health of your business. This is where you hold yourself ultimately responsible for the results of your company. The buck stops with you. There is nobody else to blame for missing a goal than yourself. You, as the business owner, are responsible for all that goes on in your business. It is up to you to put the ideas into action and to make sure that the company stays on plan.
Two words are critical, now that you have set some goals. They are: focus and action. It is focused action that you need: Action that is SMART: Specific, Measurable, Achievable, Results- Oriented and Time Bound (or, in other words, you give yourself deadlines). Action is the key to every successful business. And you must look at your business, as just that, a business. It is no longer about construction; it is about business. It is about providing a service to homeowners that they want and are willing to pay for. Success is about building a business that reaches your goals.